When Jake De Santis signed on to American International Group’s (AIG’s) financial products division, he knew the prospects of performance-related bonuses were good. In charge of a section that made billions of dollars’ worth of trades, the executive vice president had the skills, knowledge and experience AIG needed, and made sure he was compensated appropriately.But things obviously went awry last year. By mid-2008, it was clear the financial products division would sustain significant losses – mostly from credit default transactions linked to America’s “sub-prime” mortgage explosion. This would naturally mean no bonuses for those leading the charge – but AIG found itself in a unique position.
In order to trade out of the losses, it needed those same skills, knowledge and experience that it had already been paying big dollars for. It also needed to ensure details of its positions remained in-house. Ironically, retention of senior executives became even more vital as the results went south.
And so AIG agreed to guarantee bonus payments for the loss-making year. De Santis stood to gain $742,000. Many others earned more – 73 executives were guaranteed bonuses in excess of $1 million.
Fast forward to September last year and it is clear the wheels are falling off. The financial products division has the insurer on its knees – and its wide range of policies covering business risks across the world – means the world economy is also on the brink. The US Government steps in with the first of several bailout cheques and the company begins the long road back to profitability.
The question is: should those bonus guarantees have been given?
Jon Robinson, a Singapore-based executive compensation consultant (pictured), says yes. “There were very sound commercial reasons for wanting to retain those key people,” he tells HRM. “(The company) needed people who knew what they were doing.”
There are several less conciliatory opinions in the US. There, AIG executives have been lambasted by federal politicians for accepting the bonuses from what, after all, is taxpayer money.
The idea of a bonus that an employee receives regardless of his performance is certainly unique, but it isn’t limited to just AIG. Robinson says these agreements are becoming rarer with the economic downturn but still seen in some industries. “I would guess that there are still some out there,” he says. “Typically, you did see them in the investment banks (when) poaching staff.”
The AIG bonus controversy is evidence of a wider problem in the high-end US labour market. “In many ways it is broken,” Robinson admits. With a system of corporate governance that keeps shareholders out of the loop on key decisions, it is also difficult to change.
Other countries do it differently. In the United Kingdom, shareholders enjoy the “say on pay” laws – that give them a non-binding vote on executive compensation arrangements. While the vote has no weight in the boardroom, directors take notice because their own positions are vulnerabe to shareholder votes.
Robinson says Asia’s executive labour market also works smoothly. The existence of a major influencing shareholder in many leading companies means pay applications are considered judiciously. “It removes the worst of the excesses,” Robinson says. The leading shareholder “exerts control on behalf of all shareholders”.
“Asia doesn’t have the type of imperial CEO (often also the Chairman) that you see in America.”
It’s all a moot point for people like De Santis. He publicly quit AIG in March, saying the company had betrayed him and other executives. De Santis, who had agreed to reduce his regular annual salary to $1, is one of 12 senior AIG executives who have quit since the controversy became public.
In the end, retention bonuses can’t really help a company keep staff once they have been paid. It’s the promise of future bonuses that keeps workers engaged and loyal. And AIG staff seem unlikely to get any next year.